Ever since the Insolvency and Bankruptcy Code, 2016 (the “Code”) came into force, the Indian judiciary has been dealing with a number of cases that have required it to interpret various provisions of the Code. A review of the relevant judgments indicates that various interpretative tools have been applied in different cases, thereby leading to a situation of confusion and uncertainty. The decision of the Allahabad High Court in the case of Sanjeev Shriya v. State Bank of India (decided on 6 September 2017) has generated a debate over the scope of a moratorium declared under the Code and, in the ultimate analysis, over the appropriate rule of statutory interpretation.

Factual Background

The petitioners were guarantors of the corporate debtor, which was declared as a sick industrial company by the Board of Industrial and Financial Reconstruction. One of the banks filed an application under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (the “RDDB Act”) before the Debt Recovery Tribunal, Allahabad (the “DRT”) for recovery of the amount due to it against the corporate debtor as the principal borrower and the petitioners as the guarantors.

The guarantors moved an application for stay of the said proceeding against them. After hearing the parties, the DRT passed an order staying the proceeding against the corporate debtor on the basis of an order of the National Company Law Tribunal (the “NCLT”), Allahabad imposing a moratorium under section 14 of the Code. The guarantors then approached the Allahabad High Court against the said order.

Issue

The main issue before the High Court was whether a financial creditor could be allowed to pursue proceedings under the RDDB Act when the NCLT had already issued a moratorium order under the Code in respect of the corporate debtor.

Judgment

In arriving at its decision, the High Court referred to certain earlier decisions to hold that unless the liability of the debtor is determined, the guarantors could not be held liable. The liability of the corporate debtor in the instant case was still in a “fluid situation” and, in such a scenario, simultaneous proceedings should be avoided. The High Court, accordingly, stayed the proceeding before the DRT until finalisation of the corporate insolvency resolution process.

Analysis

The purpose of moratorium is inter alia to keep the assets of the corporate debtor together during the insolvency resolution process and to ensure that the company continues as a going concern till the time the creditors decide on an appropriate solution. It also seeks to ensure that the company is not embroiled in multiple proceedings occurring simultaneously, which proceedings could possibly lead to conflicting outcomes.[1]

Applying the rule of strict interpretation, one could argue that section 14 of the Code dealing with moratorium applies to the institution of suits or continuation of pending suits or proceedings against the corporate debtor, and should therefore not affect proceedings against the guarantor, if any, of such corporate debtor. Such interpretation was applied by the National Company Law Appellate Tribunal (the “NCLAT”) in the case of Schweitzer Systemtek India Pvt. Ltd. v. Phoenix ARC Pvt. Ltd. & Ors. (9 August 2017), where the question was whether the personal property of the promoter (guarantor) given as security to the creditors of the corporate debtor would come within the scope of the moratorium imposed under the Code. The NCLAT agreed with the NCLT and observed that the expression “any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property” in section 14(1)(c) made it clear that the moratorium had no application on the properties not owned by the corporate debtor.

In some cases, purposive interpretation has been applied on the ground that any other interpretation would defeat the purpose of the Code. For instance, in the case of Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (21 September 2017), the issue before the Supreme Court was whether the existence of a dispute per se without any record of initiation of arbitration proceeding in relation to it would be sufficient to make an application for initiation of insolvency resolution process by an operational creditor unsustainable. The relevant provision in this regard is section 8(2)(a) of the Code, which provides that the corporate debtor shall bring to the notice of the operational creditor “existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings.” The Supreme Court held that the word “and” used in the provision must be read as “or” keeping in view the legislative intent and purpose. If such interpretation is not adopted, there would be great hardship in a case where a dispute arose only a few days before the triggering of the insolvency process and there was no time to approach a court or a tribunal. It can be argued that such interpretation, when applied to a case similar to the one being discussed in this post, may lead to the conclusion that the words “its property” as used in section 14(1)(c) would also include the property of the guarantor.

In an earlier blog post commenting on the Sanjeev Shriya case, it has been argued that the guarantee stands invoked upon the failure of the principal debtor to pay the whole or a part of the sum due, and that there is no bar on the creditor to initiate proceedings against the guarantor by virtue of an independent contract of guarantee. Such view is in line with the observation of the NCLAT in the Schweitzer Systemtek case. However, it is submitted that such approach could lead to a situation where a creditor satisfies its debts out of the assets of the guarantor, thus affecting the financial position of the corporate debtor after the imposition of the moratorium. This, in turn, would defeat the purpose of the moratorium as explained earlier. The corporate insolvency resolution process is required to be carried on in a time-bound manner, and independent proceedings against the guarantors of a corporate debtor may cause unwarranted delays.

It is hoped that an appropriate forum clarifies the position keeping in view the aforementioned conflicting approaches to the issue.

– Deeksha Malik

[1]See notes on clauses annexed to the Insolvency and Bankruptcy Bill, 2015.

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